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Endowment is a powerful thing. It buys faculty, students, and state-of-the art infrastructure and underpins the quality of life on any campus. It announces the wealth of an institution to the world. It’s a measure of alumni loyalty and industry confidence. It’s the nest egg that helps institutions weather the lean times, but most important, endowments provide financial stability and flexibility that allow institutions to grow and prosper.

Since 1998, MIT’s endowment-donations to the Institute combined with returns on investments made with that money-has nearly doubled. As of June 30, 2001, it was valued at $6.1 billion, making it the sixth largest among U.S. colleges and universities. A red-hot economy and an investment strategy that places 40 to 45 percent of the money in alternative investments-in private equity, real estate and hedge funds-secured these gains. But in 2001, the value of MIT’s endowment declined, losing 3.7 percent of its investment value. And the losses continue: treasurer Allan Bufferd ‘59, SM ‘61, ScD ‘65, expects the endowment to shrink by another eight percent in the fiscal year ending this June 30.

As the endowment contracts, so does the money available to spend from the return on its investments. And since money paid out of the endowment contributes 35 percent of the Institute’s annual operating budget, leaner times are on the horizon. There will be fewer million-dollar lab start-up packages for new faculty in “hot” fields. The new program of Institute-funded fellowships to lure the best graduate students in the world will be trimmed back. And the Institute cannot be as aggressive in offering financial-aid packages that are competitive with those of other top-flight universities.

But the full impact of the endowment’s decline will not be felt on campus until fiscal 2004, which starts July 1, 2003. That’s because each fiscal year MIT pays out between 4.75 and 5.5 percent of the endowment’s average value during the previous 36 months. As the months that include the decline in value are added into that moving average, the amount of money available to spend will decrease. “In fiscal 2003, the financial pressures get a little tighter,” says Bufferd. “The year after, if we don’t get some recovery in terms of our portfolio, that’s a serious question for the Institute. Deeply serious? No. Serious, yes.”

Life in the Good Times

The endowment works like a mutual fund with each share receiving a dividend. Some donors restrict how the money from the shares can be spent-for student financial aid, for example, or an endowed professorship. Other shares are unrestricted; the Institute can use returns from them however it sees fit.

In 1998, each share in the endowment was paid $17.55. With the boom years folded into the moving average, that number jumped to $42 a share for the fiscal year starting this July. Although that dramatic increase has allowed the Institute to be more aggressive in areas vital to its mission, increases per share in the coming years will be minimal, thus intensifying competition across the Institute for general funds.

For the Department of Physics, which depends on general Institute resources to a greater degree than most departments, the recent increase in return per share has been crucial for attracting new talent. Last year the department received an estimate of nearly $2 million to build a new lab for an incoming faculty member. Such start-up packages have accelerated dramatically in recent years at top-caliber research universities, with million-dollar labs more common than not, according to Marc Kastner, chair of the department. “The competition is incredible,” he says.

The coming tight fiscal years couldn’t come at a worse time for physics. A flurry of retirements will force the department to hire four or five new faculty members a year over the next three years, and lab start-up packages for them will have to come out of the Institute’s general funds. With intensified competition for a shrinking pool of dollars, physics may not always have the funds to entice the best new faculty prospects.

For Kastner, good start-up packages are critical to maintaining the physics department’s strength. “We’ve had five Nobel Prize winners in the last 25 years. That’s the result of investments made 40 years ago. We need to be doing the same thing now.”

The high payout from the endowment also led to the Presidential Fellowship Program, which offers the first Institute-funded graduate fellowships in the school’s history. Until the program was established in 1998, graduate fellowships were funded primarily through research grants, so they required students to begin working on research as soon as they reached campus. Now, first-year graduate students who have their expenses paid by the presidential fellowships have no research or work requirements. This means they can take a year to learn about the research in their departments and then decide what interests them most. The program has been especially important for physics, which competes against a large group of top-tier schools for graduate students. Having the first year of graduate school fully funded has attracted stronger students to the department, Kastner says, because they can focus on academics first and research later.

According to Provost Robert Brown, the Presidential Fellowship Program is the area of greatest concern across the Institute. “We built it into the budget to be supported internally off general Institute funds with the expectation of replacing those funds with funds from the endowment raised specifically for that purpose,” he explains. But gifts to endow graduate fellowships have lagged, and coupled with the decrease in unrestricted monies expected by 2004, that shortfall will force the fellowship program to scale back.

Financial aid is another area where the huge jump in available funds has made a significant impact. For the academic year 2000-2001, undergraduates received $34.5 million in grants and scholarships. For 2002-2003, that figure has swelled to $42.8 million. Of that, $36.8 million comes from shares in the endowment that are restricted to financial aid and from gifts earmarked for that purpose. The remainder comes from the general, unrestricted funds from the endowment-the same pool that physics depends on.

Making more aid available was not done to offset rising costs, says Elizabeth Hicks, director of student financial services. Rather, it was an attempt to build more-competitive financial-aid packages. “We’ve made a tremendous effort to decrease what students are expected to borrow and earn,” says Hicks. Students are now expected to contribute $5,600 during the academic year, down from the previous $7,600. But that number needs to be even lower, she says. Three of the top schools that compete with MIT for incoming students expect them to contribute less than the Institute does. Stanford University expects students to contribute $5,250, Harvard University $3,250 and Princeton University $2,320.

MIT’s aid offerings also tend to be low because the Institute, unlike its competitors, still includes home equity in the financial-need analysis. “Our financial-aid packages are not as generous as our competitors’,” says Hicks. “MIT has a lot of catching up to do.”

Hicks hopes that, to allay some of the concerns about financial aid, the Institute’s current capital campaign will raise enough new money for the endowment to satisfy a larger percentage of the financial-aid budget, reducing her reliance on unrestricted general funds.

Planning for the Down Times

Looking forward to the fiscal 2004 budget, which will be based on the 36 months that include the endowment’s recent losses, the Institute is already taking steps to soften the blow. First, for fiscal 2003, a percentage of the funds that could be spent from the endowment return were not distributed, reserved instead for tighter years-a kind of rainy-day fund. In addition, administrators are employing different budgeting strategies.

“We intimated clearly to everyone who is dependent on general funds that the growth they’ve seen in prior years is going to decline,” says John Curry, MIT’s vice president for administration, who collaborates with Brown and Chancellor Phillip Clay, PhD ‘75, on developing the Institute’s operating budget.

Curry has provided financial officers with workshops on how to examine their budgets for ways to increase efficiencies. He also has held back one percent of nonsalary costs in fiscal 2001 and 2002. Other strategies include slightly lower salary increases, less-aggressive growth in financial-aid awards, and reevaluation of positions that open to see if they are necessary or if they can be left at least temporarily unfilled.

The lagging endowment affects tuition as well. In February, President Charles M. Vest HM announced that tuition for 2002-03 will be $28,230, a 4.7 percent annual increase. “There’s no doubt that in times when the endowment is increasing, there’s less pressure on raising tuition,” says Brown.

Still, he says, return from the endowment is only one of many revenue streams that MIT considers when it sets tuition; others include new gifts to the Institute, sponsored research funds and auxiliary enterprises such as residence halls and dining halls. Even with the tuition hike, the Institute will experience a decrease in tuition revenue next year because the incoming class was decreased from 1,033 to 1,000 students to reduce crowding in residence halls.

Is MIT on sound financial footing? Absolutely, says Bufferd. “No institution with an endowment larger than us has outperformed us on an investment return basis in the last five years,” he says.

But Bufferd feels that MIT is underendowed. The most telling financial measure, he says, is “not the size of your assets, it’s the ratio of assets to your operating budget.” The higher this ratio, the healthier and more flexible the institution. With MIT’s total financial assets, as of June 30, 2001, weighing in at about $7.3 billion and an operating budget of about $1.4 billion, MIT’s ratio is about five or six. By comparison, he says, the ratio at Harvard is eight or nine; at Williams College, it’s been even higher. “You see that reflected in other things,” he says. For example, in 2000-2001, Williams froze tuition.

The cost of developing science and engineering labs and furnishing them with the latest equipment puts a higher demand on MIT’s resources than most other colleges and universities have to contend with. And with the key competitors for incoming students being schools with significantly larger endowments and less-intensive infrastructure demands than MIT, the need to grow the Institute’s endowment continues to escalate.

Despite tough economic times, both Brown and Curry are confident that MIT can maintain its position. “The glass is always half full at MIT,” says Curry. “I feel enormously positive about it now. When the going gets tough, the best get better, and that puts MIT in a very strong competitive position in bad times.”

Brown echoes that confidence. “As an institution, we are able to attract the very best faculty, and our financial aid attracts the very best undergraduates,” he says. “As long as we can do those things, we’ll be fine.”

Top 10 Endowments, 2001
(in millions)

SchoolEndowment
Harvard$17,951
Yale$10,700
U. of Texas System$9,364
Princeton$8,359
Stanford$8,250
MIT$6,135
U. of California$4,703
Emory$4,316
Columbia$4,293
Texas A&M U. System and Foundation$4,031

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